09 Nov 2016

Gun Stocks and the Efficient Market Hypothesis

Economics 18 Comments

Does it make sense that gun stocks soared when Obama won, and tanked when Trump won?

The layperson intuition is obviously, “People rush to buy guns when they think a ban is imminent, and so the higher sales are good for Smith & Wesson stocks.”

However, does that make sense? Shouldn’t today’s stock prices reflect the long run?

(For example, nobody would expect coal stocks to rise after an Obama victory, even though there might be a small effect of people buying electricity ahead of new EPA rules and a consequent price hike in energy.)

One way to make sense of this outcome is that even over the long term, people are going to buy more total guns if they think the federal government is going to try to ban them. In other words, the prospect of an Obama ban didn’t merely “pull sales forward,” but it created sales that otherwise would never have existed.

Is this the only plausible mechanism? Because in general, it seems weird that investors might secretly hope for the government to outlaw their product. We didn’t see this in the tobacco industry, right? If not, why the difference? (I am not merely asking rhetorically; I can think of some relevant differences, which might be driving the results. But I open the floor to discussion.)

18 Responses to “Gun Stocks and the Efficient Market Hypothesis”

  1. Tel says:

    Geocaching electricity is an interesting concept, but I think there might be technical issues.

    Shouldn’t today’s stock prices reflect the long run?

    Only a reflection of what is KNOWN about the long run.

    As Trump’s recent victory has demonstrated to a lot of people… you don’t know as much as you think you know, especially when it comes to what your government will do next.

  2. Dan says:

    Anecdotal, but I work with multiple people that were going to buy an AR-15 of Hillary won, but have no plans to now. One guy’s wife would only let him buy if Hillary won, so that’s why he won’t now, and another was only going to buy because he thought he might never be able get one if he ended up waiting, but now he doesn’t really see the need to spend the money on it. I also know of friends that buy guns when liberals get in power as an investment. They can turn around and sell it for more than they paid and make a quick buck. So liberals definitely cause some people to buy guns they wouldn’t have otherwise bought.

  3. Transformer says:

    Totally unrelated but I thought Bob might enjoy this:


  4. Major.Freedom says:

    Tobacco cannot be used as a defense weapon against those who want to aggress against you to steal your tobacco.

    Guns can be used as a defense weapon against those who want to aggress against you to steal your guns.

    I think the topic of guns and gun prohibition can be tricky because guns, or more generally weapons, are unique in that they are used to both attack and defend, so the regular correlation reasoning for all other goods does nt apply. The hope is that the jump in purchases of guns will stop the reason for buying more guns in the first place.

  5. von Pepe says:

    Time value of money. Lets say the gun companies are risky = WACC of 15-20%

    If those purchases are pulled forward one year they are all worth 15% + what they were under the previous state of affairs i.e. sales in the next year.

  6. Khodge says:

    One can and does see huge volatility swings in the oil markets after an election. In the case of guns, the market had priced in continuing sales because of an anticipated Clinton win. This was, essentially, a market bet for Hillary with the losers paying up the following day.

    Of even more interest was that markets had bet on continuing economic malaise had Clinton won. At the very least, there was concern that Congress could not contain a shrewd president who could control the legislative process.

  7. Harold says:

    Perhaps people are going to buy more total guns if they think the federal government is going to try to ban them, but fail to do so.

    Some people are concerned about a ban, so rush out to buy guns. The efficient markets actually know that the Govt has not got a hope of succeeding, so the investors put money in. The theory is efficient markets, not efficient gun buyers, who only make up a small fraction of the market. The market reacts rationally to the gun buyers irrationally.

    • Andrew_FL says:

      Factually unjustified paranoia is not the same as behaving irrationally. They have a sincere paranoid belief, based on a sincere misreading of fact, and they rationally act on that belief.

      • Harold says:

        Paranoia is irrational, so the belief is irrational. Otherwise irrational has no meaning.

        • Andrew_FL says:

          It does have a meaning, you just have no clue what it is.

  8. Dave says:

    The best case scenario for gun manufacturers is if consumers believe, incorrectly, that the feds are going to ban guns.

  9. Andrew_FL says:

    Here’s the telling thing, Bob. In 2008, Democrats took control of both houses of Congress and the White House. While Harry Reid was majority leader and could’ve passed whatever he wanted, he killed Democratic proposals for gun control.

    Democrats like to fundraise on the gun control issue, but they know that, as a matter of policy, it’s politically losing issue to actually do a gun grab.

    But Republicans are paranoid, convinced any day now that Democrats will suddenly really mean it this time when they talk about taking people’s guns.

  10. Michael Tew says:

    Another mechanism is that a large spike in demand can allow a manufacturer to charge much higher prices than what is normal. So even if you’re only pulling forward from future sales, your profit might be much higher as you end up charging a lot more per gun.

  11. Greg Morin says:

    For electricity (becoming more expensive due to banning coal) there is no ready way for the average consumer to “stock up” on energy in anticipation (speculation) of a higher future price.

    For cigarettes, I think that’s because there’s never been a serious rumor or talk of a possible ban. Price increases due to taxation is so slow as to be imperceptible to most so I think so no one bothers stock up more than a few months if they catch wind of some new tax come January. If one is a big smoker it just isn’t practical to store pallets of cigarettes to last a lifetime.

    Guns are different, they are not consumable (within reason), and are easily and compactly stored. A foot locker can hold a LOT of guns! More than the average person would ever imagine they would need. I did that. I had one gun. When Obama was elected I got about 4 more over a couple of years just because of expectation of a possible ban or massive increase in difficulty in getting one in the future. So 1 to 4 is not huge, but if everyone did that, that means gun sales quadrupled, that’s huge! Maybe I should lobby the government to ban aquariums… hmmm….

  12. baconbacon says:

    One off the top of the head answer

    Guns purchases make certain people feel secure, when their political rivals win they buy more guns. When their side wins they gain less from gun sales as they already feel secure from winning the election and buy fewer guns.

  13. Toby says:

    What about the discount rate? Today’s stock price is the NPV of the company. Perhaps sales today are more valuable than sales tomorrow.

  14. Matt M says:

    I actually wrote about a somewhat related topic to this a few months ago.


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